Debt: How Much is Too Much?

Nowadays, most Canadians carry some form of consumer debt. Credit, when used wisely, can be a good thing. But many Canadians are over-extended, financially stressed and struggling to perform a delicate fiscal balancing act. If you are concerned about debt and are beginning to wonder how much debt is too much, here are a few questions to ponder.

What percentage of my take-home pay is being used to service consumer debt?

The experts say no more than 10-15% of your take-home pay should be used to service consumer debt. Depending on how much you earn, your debt-servicing threshold might be a little or a lot, but if your take-home pay is $2,500 per month, using more than $250-375 per month to service debt payments could be too much.

Am I making only minimum monthly payments to my creditors?

If the answer is to this question is “yes”, you need to be concerned with credit card debt and lines of credit, where your minimum monthly payment is based on a percentage of the balance owing. If you have a $5,000 credit card balance with interest accruing at 18% and you pay only the minimum payment (based on 2.5% of the balance outstanding each month), it will take you over 300 months to repay the debt and it will cost you over $7,100 in interest! If you have several credit cards and can only make minimum monthly payments, you probably have too much debt.

Am I at or over my credit limits?

Being chronically at or over your credit limits not only lowers your credit score - it can also be a sign that you have over-extended yourself and may be headed for trouble. If you cannot find enough money in your budget to seriously chip away at the outstanding balances, this is another sign that you have too much debt.

Am I using cash advances from one credit card to pay others?

This situation is what we call “Borrowing from Peter to pay Paul”. Continuing this cycle will only take you further into debt. If you relate wholeheartedly to this scenario, you have too much debt.

Am I considering a second job to balance my budget?

Given the cost of living these days, aren’t we all? But seriously, if debt obligations alone are causing you to work extended hours or to take on part-time work, your debt load is likely too much.

Do I know exactly how much I owe?

If you don’t know exactly how much you owe, you aren’t paying attention and it will eventually come back to bite you. If you don’t know exactly how much you owe, it’s likely that you don’t know exactly how much you spend, either. Both are warning signs that you are not in control and sooner or later, if left unchecked, both will lead you to being faced with too much debt.

Do I get a queasy feeling when I think about my debt?

Let’s face it – nothing beats a good ‘ole “gut check”. Your instincts will never lie. Are you ready? Can you handle it? Breathe in deep, close your eyes and ask yourself: “Am I in over my head”? If thinking about debt causes you to feel fear, anxiety and worry – or if it hurts so bad that you don’t want to think about it at all - then you definitely have too much debt.

There is no “magic formula” for determining how much debt is too much. Whether a little or a lot is too much will depend on your particular financial circumstances (i.e., income / expenses, net worth and family situation), your values about money and credit and your personal tolerance for using tomorrow’s income to pay for today’s goods and services.

If you think you might have too much debt, speak with a financial professional who can offer options and sound advice and give you the tools you need to get you back on track financially. If you don’t have too much debt, continue to enjoy the privilege of credit cautiously and responsibly.

Lana Gilbertson is a Licensed Insolvency Trustee within our Vancouver location. To learn more about how MNP Debt can help you, contact any of our local offices.